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Comparing the Revenue and GDP Effects Of Republican Candidates’ Tax Plans

5 min readBy: Stephen J. Entin

We have modeled the economic effects of seven taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plans released by seven of the Republican Presidential candidates. (Click here to see our presidential tax plan analyses). This blog provides a convenient side-by-side comparison of the GDP and federal revenue estimates in the seven plans. The numbers are for the ten years of the budget window, 2015-2024, and are compared to the Congressional Budget Office (CBO) GDP and federal revenue baseline numbers for that period. These are tentative estimates that will change somewhat over the next six months as the CBO releases a new economic and budget baseline for 2016-2025, as our Taxes and Growth Model is expanded and revised, and as we are able to add certain transition costs and international tax considerations not currently modeled, or if the candidates’ plans are revised and additional information on their transition plans are released.

Four of the candidates’ tax plans (Carson, Cruz, Paul, and Rubio) would have very large positive effects on GDP, between roughly $16 trillion and $20 trillion dollars in additional output and income over the ten years. (Please see table.) These plans dramatically reduce the current tax biases against saving and investment, and incorporate the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of investment in plant, equipment, and buildings. Two more modest tax reduction proposals (Bush and Santorum) would boost GDP by nearly $13 trillion. They have lower initial revenue costs, but are equally focused on cutting the cost of capital formation. The Trump plan is the largest in terms of static revenue reduction, but it falls nearer the lower range of GDP gains, at a bit under $15 trillion. It is the least focused on cutting the cost of investment.

The first six plans recover the majority of their initial revenue loss due to growth of incomes and/or offsetting reductions in deductions and tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s. (Static revenue numbers assume no growth in GDP; dynamic revenue numbers take GDP growth into account.) The Bush, Caron, Rubio, and Santorum plans recoup between 55% and 60% of their initial revenue losses. The Cruz plan regains 79%. The Paul plan limits deductions and credits more than the other five, and would raise revenue over the budget window. All recover substantial revenue due to sharply higher capital formation and wage gains. The Trump plan does less for capital formation, and recovers about 15% of its initial revenue loss.

The plans have different effects on the residual federal budget deficit. The Paul plan shows a dynamic revenue gain. The Carson and Rubio proposals have roughly $2.4 trillion in residual revenue loss, the Carson plan due to very large tax rate reductions, and the Rubio plan due to an additional child credit. The Santorum and Bush plans have smaller residual dynamic deficits of roughly $1.1 trillion and $1.6 trillion, respectively, due to their more modest initial costs. The Cruz plan has a residual deficit under $0.8 trillion, due to significant base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. under the business transfer tax. The residual Trump deficit would be $10 trillion, due to a higher initial cost and less GDP growth per dollar of tax cut.

In addition to the raw gains in GDP, the gains from the plans could be compared in terms of “bang for the buck,”, or how much the GDP increases per dollar of revenue loss to the government. These gains range from “infinite” under the Paul plan (a net revenue rise), to about $23 per dollar of dynamic revenue loss for Cruz, to about $8 to $11 for Bush, Carson, Rubio, and Santorum, to $1.45 in the Trump plan. (This comparison must be made with a bit of caution if the revenue loss becomes small or less than zero, as with Cruz and Paul, as division by zero sends the ratio through the roof!) The six plans that generate about $8 or more in GDP per dollar of revenue loss are relatively efficient tax reductions. Even if the public had to give up attractive government services to eliminate the residual deficits, the gains in income under these plans would far outweigh the loss of the government spending. If the spending reductions are on things that the public does not value highly (i.e. wasteful spending), the net gains to the public would be even higher (the GDP gains plus the dollar of tax saving).

Changes from CBO Baseline
10-year sum 2015-2024, $ billions Bush Carson Cruz Paul Rubio Santorum Trump
Static revenue change -$3,666 -$5,617 -$3,666 -$1,797 -$6,055 -$3,223 -$11,980
Dynamic revenue change -$1,611 -$2,472 -$768 $737 -$2,401 -$1,093 -$10,135
GDP increase vs. baseline $12,793 $20,263 $17,712 $16,483 $19,116 $12,793 $14,720
Change in GDP Per Dollar of Revenue Loss**
10-year average 2015-2024 Bush Carson Cruz Paul Rubio Santorum Trump
10-year ratio vs. static revenue loss $3.49 $3.61 $4.83 $9.17 $3.16 $3.97 $1.23
10-year ratio vs. dynamic revenue loss $7.94 $8.20 $23.06 NA*** $7.96 $11.70 $1.45
*Note: revenue estimates will change with new CBO baseline releases, time shifts (new budget window), revisions to published plans, and as transition costs and international tax considerations are added to future versions of the model.
**Ratios are dollar gain in GDP per dollar loss in tax revenue. Total gain to taxpayers is $1 more, tax saved plus the GDP gain.
***”NA” means the revenue loss disappeared due to growth, producing a net revenue gain.

The true cost of government spending is what the public loses in exchange. This includes the damage to the economy and peoples’ incomes as well as the on-budget cost of the spending and the tax imposed to pay for it. The true benefit from spending restraint must be measured in a similar manner. A cut in government spending may reduce a benefit to the public, but it may also allow a tax reduction of equal size that could generate a significantly larger gain in economic output and incomes if it removes tax barriers to production, capital formation, and hiring.